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In this article, we’ll explore the principles of double entry bookkeeping, its importance in maintaining financial accuracy, and how it forms the basis of modern accounting practices.
Double entry bookkeeping and accounting method in which every transaction is recorded in two accounts, a debit to one and a credit to another. For example, if a business takes out a £1,000 loan, the asset (cash) is debited to £1,000 and the liability (loan) is credited £1,000. This means that both accounts are increased by the same amount.
Double entry bookkeeping should be used by all businesses, it is an important method to ensure that all financial information is accurate and complete.
Some business owners will deal with all of their double-entry bookkeeping, however often bookkeepers or accountants are involved to help set up and run suitable systems for bookkeeping needs.
The concept of double entry bookkeeping is simple, every transaction will have two equal and opposite elements. For example purchasing equipment your cash balance will decrease, but your assets value will increase.
The entries within double entry bookkeeping are often referred to as credits and debits, these are the two sides of every transaction within accounting.
The accounting records will be an accumulation of double entries. The entries are summarised in a general ledger, which represents the sum of all entries analysed by type. Within general ledgers, credit entries are on the left and debit entries are on the right.
As every transaction is recorded in at least two accounts, it increases accuracy through the system of recording transactions. It creates more transparency which ensures that financial statements are accurate.
As you can track both incoming and outgoing payments, it provides a more accurate depiction of a company’s financial health. This allows for businesses to make better decisions on how to allocate their resources as they can clearly see their cash flow.
As every entry is recorded into two separate accounts, with each being debited or credited for the account of a transaction, it makes it easy to track any income and expenses of the company. This allows businesses to see where their money is going and where they could be overspending.
Human error can impact a company’s financial position. However, with double entry bookkeeping, it reduces the chance of that as it provides checks and balances. Double entry booking easily catches errors as both the debit and credit values are equal, if they are not then it can be investigated. Although it can reduce errors, it does not completely prevent errors.
Here are some examples of how double entry bookkeeping works
You have started a new t-shirt printing business and want to purchase t-shirts to be printed on (worth £1,000) with credit.
| Debit | Credit | |
| Accounts Payable | £1,000 | |
| Stock (T-shirts) | £1,000 |
In this case, the value that has increased is the value in your stock. Although as you bought the stock on credit, your accounts payable also increased by £1,000.
You may need a new laptop or computer to run the business, so you decide to buy a £500 laptop with cash.
| Debit | Credit | |
| Cash | £500 | |
| Resources (laptop) | £500 |
In this example, you have traded one asset for another by trading cash for a laptop. Therefore it must be updated within your ledger.
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